The U.S. Small Business Administration on Thursday rolled out a commercial mortgage refinancing program that should help business owners who've seen their property values tank and now aren't able to obtain conventional refinancing at a bank.

Commercial real estate refinancing affordable once again

Small-business owners who bought their shops or offices at the peak of the real estate bubble are feeling the consequences got some good news this week.

The U.S. Small Business Administration on Thursday rolled out a commercial mortgage refinancing program that should help business owners who’ve seen their property values tank and now aren’t able to obtain conventional refinancing at a bank.

“I’ve been getting calls about this since October,” when federal legislation authorizing the program passed, said Jeff Sheffler, vice president of government guaranteed lending for Associated Bank. “I think the demand for this is going to be great.”

Many business owners bought their buildings back in 2005 through 2007, taking advantage of generous loan prices and terms to get better control of their operating costs.

“A lot of businesses were also taking advantage of those high property values to refinance their loan and take some cash out to generate working capital,” said Herb Tousley, director of the Shenehon Center for Real Estate at the University of St. Thomas.

Those loans typically were written to amortize over 20 years, but they came with five-year balloon payment provisions, which means many of them need to be refinanced within the next two years.

Conventional bank lenders won’t be able to write many of those new loans, though. Many properties lost between 20 and 40 percent of their assessed value after the commercial real estate bubble started to deflate in 2008, Tousley said, pushing values down to a level at or below the principle remaining on their mortgage.

That means owners need to come up with more cash to refinance their mortgage, and few small businesses are carrying a surplus of cash right now.

“You’re not going to find a way for those borrowers to meet bankers’ [standards],” who still see a lot of risk in commercial real estate, Sheffler said. “We’re seeing financial statements improve for our business customers, and we’re seeing improvement in their cash flows. But there’s no recovery on commercial property values yet.”

The SBA refinance product gives a helping hand to borrowers and lenders.

Business owners are required to provide just 10 percent of the property’s value in equity investments – which is much easier to come up with than the 20- to 25 percent a conventional loan requires.

The SBA, working through community-based certified development corporations (CDCs), guarantees 40 percent of the loan and provides that at a fixed interest rate (currently 6.1 percent) for 20 years.

A bank makes the remainder of the loan, but only has to carry 50 percent of the risk on its books. It writes the loan at its conventional price and terms – which are usually renewed and re-priced after three to five years.

“No bank would fix a rate for 20 years, so this SBA tool gives a borrower a lot more comfort and certainty about their costs,” said Kim Storey, who manages SBA loans for Highland Bank. “And 6 percent is certainly not a bad rate to have fixed.”

The refinance program can back mortgage loans of up to $13.75 million for manufacturing companies or $12.5 million for other businesses. The SBA guarantees up to $5.5 million and $5 million for the two categories. Only loans that come due by the end of 2012 are eligible now.

The initiative solves some knotty, individual financing problems, but it delivers broader benefits, too. It gives the commercial real estate market a little more stability by keeping more owners in their buildings, Sheffler said. “We don’t really want to see any more commercial properties coming on the market.”

And it helps deliver a little more fuel to the small business recovery, said Paul Flood, manager of SBA landing for Bremer Bank in St. Paul. “Instead of having to find a lot of cash to pour into their building, a business owner that uses this product can keep that cash as working capital and use it to grow their business.”

6 comments

What are owners of building where they cannot find enough quality tenants to support the Mortgage, CAM and Taxes? Are there any programs for this through the SBA ? Is it better to just stop paying the taxes and Mortgage and let the property go back to the bank ?

I am looking to refinance my commercial rental building april 1st 2013. it’s a 3 level 9600 sf building with 10 tenents and2 vacancies at this time. my present loan comes due in april with a local bank. they are considering renewal. I’m shopping for a fixed 20yr contract. your info on the SBA loan sounded good.

if interested, call me at 6128170384. would prefer to talk with one of your representatives.